What You Need To Know
Before Filing Your Taxes

The taxman giveth, and the taxman taketh away.

As millions of taxpayers scramble to meet the April 15 filing deadline, they need to pay attention to several new tax-law twists -- and watch out for a few classic blunders.

QUESTION OF THE DAY

How do you prepare your tax return? Pencil and paper, a computer program or a professional preparer?

Among the new provisions: a deduction for mortgage-insurance premiums and special relief when a lender forgives a debt on your home. There's even a new break for people who work for the Central Intelligence Agency, the National Security Agency and other similar organizations -- and it's not top secret.

But there are also new restrictions, such as a new record-keeping rule for cash donations. Separately, the Internal Revenue Service issued a long-awaited ruling last year shooting down an investment idea that some accountants had recommended to their clients.

ADDITIONAL READING

• For more details on tax-law changes, see IRS Publication 553 (.pdf)

• For more information on tax issues affecting individuals, see IRS Publication 17 (.pdf)

• Here is the IRS form to use to apply for a filing extension. (.pdf) This extension will give you more time to file -- but not more time to pay what you may owe.

Even if you've mastered all the new rules, it's easy to trip over a few old ones. For example, most married couples probably realize they're better off filing jointly, rather than separately. But for some people, filing jointly can be a major error. Separately, many upper-income taxpayers who worked for two or more employers last year may have paid too much in Social Security taxes.

If you can't finish your return by April 15, you can file for an automatic six-month extension. But filing on time is especially smart this year because the Treasury Department will be handing out more than 130 million economic-stimulus payments, starting in May. To get a check this year, you have to file a return for 2007.

Here are a few significant changes to look for this year, as well as other last-minute tips and warnings from accountants and enrolled agents:

• Individual Retirement Accounts. You can still make a contribution for 2007 to an IRA as long as you do it by April 15.

The good news is that the income limits for tax-deductible contributions to a regular IRA have increased again. That means more people are eligible to get a deduction, says Greg Rosica of Ernst & Young in Tampa, Fla.

Suppose you're covered by a retirement plan at work and file jointly with your spouse. If so, the income phase-out range for 2007 was $83,000 to $103,000. (That means the deduction begins to phase out if your income exceeds $83,000, and it's gone completely at $103,000.) For 2006, the range was $75,000 to $85,000.

Income limits also rose for contributions to a Roth IRA, in which contributions aren't deductible but withdrawals are typically tax-free.

The maximum contribution to either type of IRA for 2007 is $4,000 if you were under 50 and $5,000 if you were 50 or older, says Ed Slott, a Rockville Centre, N.Y., IRA consultant. For 2008, the limits rise to $5,000 for those under 50 and $6,000 for those 50 or older, Mr. Slott says.

• New breaks. The new mortgage-insurance deduction is limited to those with income below a certain level. The deduction begins to disappear once your adjusted gross income exceeds $100,000, or $50,000 for a married person filing separately. It disappears completely once income exceeds $109,000 or $54,500, respectively.

Some homeowners who had debt forgiven by a lender may benefit from another new law. You're allowed to exclude from your income qualified mortgage debt that was forgiven on your principal residence up to $2 million, or $1 million for married people filing separately. To claim this exclusion, use IRS Form 982 (www.irs.gov).

Some employees of the CIA and other intelligence agencies will benefit from a new twist in the home-sale rules. The new law allows special leniency for someone from the "intelligence community." If you sell your main residence for a profit, you may be able to exclude that gain from your income even if you can't pass the usual ownership and use tests required. For more details, see IRS Publication 523.

• Charity. You are no longer allowed to deduct a cash contribution, no matter how tiny it may be, unless you have proof. Proof includes a "bank record," such as a canceled check, bank statement, credit-union statement or a credit-card statement, showing the name of the charity, the date of your gift and the amount. Or you could get a receipt from the charity showing all those details.

• It's a wash. IRS officials issued a ruling late last year answering a question raised in this column many years ago. Suppose you sell a stock at a loss in your regular taxable account and then buy the same stock a few minutes later for your IRA. Can you deduct your loss? Or have you violated what's known as the wash-sale rules and are thus unable to deduct the loss? (A "wash sale" typically occurs when you sell or trade securities at a loss and buy the same thing, or something "substantially identical," within 30 days before or after the sale.)

The IRS's decision: If you did that maneuver, you did indeed violate the rules and can't deduct your loss.

• Filing jointly. In most cases, it pays for a married couple to file a joint return, because it usually means a lower overall tax bill. But not always. For example, it might pay for a two-income couple to file separately if one spouse has unusually large medical bills, says Bob Scharin, senior tax analyst at Thomson Tax & Accounting in New York. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income. Thus, filing separately could make a larger amount of those medical bills deductible, he says.

Another reason to consider filing separately: When you file a joint return, you're typically each liable for the full tax bill. If you file separately, you're responsible only for your own tax. That can be smart for some people thinking about getting divorced, or who fear the other spouse may be hiding income or overstating deductions, Mr. Scharin says. (In some joint-filing cases, one spouse may be able to avoid joint liability by claiming to be an "innocent spouse" -- but it's typically very difficult to succeed with that argument.)

• Avoiding bloopers. If you worked for two or more employers last year, check to see if you had too much Social Security tax withheld from your wages. The maximum amount of wages subject to the tax for last year was $97,500. The maximum tax that should have been withheld was $6,045. Enter the credit on Form 1040, line 67, or include it in the total for Form 1040A, line 42, the IRS says.

• Don't forget to check to see whether it would make sense to deduct your state and local sales taxes, instead of state and local income taxes. This is especially important for people in Florida, Texas and other states with no income tax. But many people in other states also may benefit from it. Just remember: You can't deduct both sales taxes and state and local income taxes. And you can't deduct either unless you itemize.

• If you've been looking for work, certain job-search expenses may be deductible -- even if you haven't yet landed your dream job. But you can't deduct any of these expenses if you're looking for a job in a new occupation, or if you're looking for work for the first time, or if there was a "substantial break" between the end of your last job and your search for a new one, the IRS says. This can get tricky. Consider consulting a tax pro.

• Many people automatically claim the standard deduction even though they would be better off itemizing, government studies have shown. Crunch the numbers both ways to see which is better.

• Finally, don't even think of filing a return arguing that wages aren't taxable, or that filing a tax return somehow is voluntary -- or similar theories that have been routinely rejected by the courts. The Justice Department is expected to announce a major new initiative soon designed to discourage people from making "frivolous" filings. If you're eager for big trouble, try making one of these arguments. Also, there is a $5,000 penalty for filing a frivolous return.